In our paper, “The Impact of Political Connectedness on Firm Value and Corporate Policies: Evidence from Citizens United,” we examine the reasons behind a company’s decision to become politically connected and what impact such connections have on firm value and corporate policies. Political connections may enhance or harm shareholder value. However, existing insights attempting to address the impact of corporate political connectedness on shareholder value are inconclusive. In an effort to test for the existence of a causal link between political connections and changes in shareholder value, we pose our research questions in the context of a natural experiment. Specifically, we focus on an exogenous enhancement in the value implications of political connectedness that accompanied the landmark Supreme Court case, Citizens United.
The findings of our paper support a negative relation between political connections and firm value. Using an event study methodology and a seemingly unrelated regression design, we find that politically connected firms realized significant negative abnormal returns following announcement of the Citizens United decision. Specifically, historically politically connected firms see an abnormal price drop of –0.475% on announcement date and a cumulative abnormal loss of –1.219% five days after announcement date, while historically non-politically connected firms exhibit a positive but insignificant market reaction. Collectively, these findings are consistent with a positive association between agency costs and political connectedness.
Given the negative implications of political connectedness on firm value, we further investigate whether the corporate policy decisions of politically connected firms are suggestive of agency conflicts. Building upon previous studies that document a positive association between agency problems and cash holdings (e.g., Jensen 1986; Stulz 1990; Harford 1999), we evaluate whether the corporate cash holdings of connected firms significantly differ from those associated with their less-connected counterparts.
The findings in our paper reveal a connection between political activism and corporate policies. Using a difference-in-differences research design that controls for relevant firm characteristics, we find that politically connected firms increased their cash holdings following passage of Citizens United relative to before its passage. Poor corporate governance quality, captured by managerial entrenchment, busy board members, excessive remuneration to the CEO, and investor inactivism in the context of politically-oriented shareholder proposals also aggravates the existing agency conflicts within politically connected firms, as evidenced by an incrementally and significantly greater level of cash holdings. Finally, political tension within a firm, defined as divergence in the party affiliation of political contributions of executive employees relative to that of non-executive employees, is associated with incrementally greater cash holdings. Collectively, our findings are consistent with the existence of agency problems in politically connected firms.
The full paper is available for download here.